I INTRODUCTION

Federal Law No. 135-FZ dated 26 July 2006 On Protection of Competition (the Competition Law), which has undergone a series of amendments aimed at removing red tape and eliminating certain administrative formalities, is the main statute in the area of merger control. The Russian competition authority, the Federal Antimonopoly Service (FAS), and its regional offices remain the authority responsible for the enforcement of the merger control rules.

Decrees of the Russian government and regulations of the FAS are adopted in furtherance of the statutory provisions and deal with the technical aspects of the filing, including the contents of merger clearance notifications and other procedural issues. In addition, the competition authority has issued guidelines, for instance, on the assessment of joint venture agreements, which shed some light on the analysis of non-compete clauses.

The past year was marked by significant changes to the Competition Law: the long-awaited Fourth Anti-monopoly Package was signed into law by the president of the Russian Federation on 5 October 2015, and came into effect on 5 January 2016. The amendments affect virtually all areas of antitrust regulation and result in, among other things, changes to the existing merger control rules.

Apart from the Competition Law requirements (i.e., the merger control regime), transactions involving a foreign party may be caught by Federal Law No. 160-FZ dated 9 July 1999 On Foreign Investments in the Russian Federation and Federal Law No. 57-FZ dated 29 April 2008 On Procedures for Foreign Investment in Companies of Strategic Importance for National Defence and Security of the Russian Federation (the Strategic Investments Law). The Strategic Investments Law applies to transactions associated with the participation of foreign investors in companies active in strategic sectors (e.g., nuclear power, military technology, space industry, aircraft, cryptography and the manufacturing of explosives). A specifically appointed Government Commission is responsible for the approval of such transactions.

Previously, the Strategic Investments Law saw partial liberalisation when several types of transactions were excluded from its scope. A new reform of the Strategic Investments Law was initiated by the FAS in 2015. It is expected to improve the efficiency of enforcement and control, as well as to clarify some basic concepts (e.g., ‘foreign investor’ in the case of Russian nationals that are also citizens of other countries) and provide a list of transactions exempt from the requirements of the Strategic Investments Law. The Government Decree issued at the beginning of 2016 introduced changes to the operation of the Government Commission with a view to allowing absentee voting that is generally supposed to streamline reviews and decision-making relating to ‘strategic’ clearance.

II YEAR IN REVIEW

i Key legislative developments

The adoption of the Fourth Anti-monopoly Package was a key development in terms of its strategic and practical impact on market players.

First, the scope of transactions subject to merger clearance has been broadened. One of the most important novelties is the need for competitors to obtain the prior approval of the FAS for joint venture arrangements in the Russian Federation if the turnover or asset-based thresholds are exceeded. The changes constitute a logical and positive step in the overall development of the Russian anti-monopoly legislation, which is largely reflective of the experience of the European Union. If the following thresholds are met, the joint activity requires mandatory clearance:

  • a the aggregate worldwide value of assets of the groups involved exceeds 7 billion rubles; or
  • b the aggregate worldwide revenue of such groups for the past year exceeds 10 billion rubles.

Clearly, the term ‘establishment of a joint venture’ is correct. The term ‘agreement on joint activities’, however, is broad (as suggested by the FAS’ clarifications published in 2013, well before the entry into force of the Fourth Anti-monopoly Package) so, in principle, it may also catch other commercial arrangements aimed at establishing cooperation. As a consequence, regardless of whether a separate legal entity is created, the merger clearance requirements of the Competition Law may now potentially catch cooperation agreements even though they are not an M&A transaction.

Previously, agreements on joint activities (joint ventures) could trigger the general rules on merger clearance, depending on the structure of the project (share or asset deals). However, in many instances the creation of a joint venture did not need to be cleared with the FAS. Cooperation agreements were not subject to clearance and were mainly assessed in light of the general restrictions applicable to anticompetitive agreements. As of 2016, agreements between competitors involving cooperation can be potentially caught by the merger control provisions.

Overall, merger control brings more clarity to the regulation of these relationships: competitors will be more confident that their agreement to create a joint venture will not result in a restriction of competition, as determined by the approval (formal decision) of the competition authority. Accordingly, the risk of being held liable in connection with the conclusion of such an agreement is significantly reduced.

Still, taking into account the broad definition of ‘agreement on joint activities’ and limited experience of the competition authority in the matter, competitors should treat all contemplated cooperation agreements with caution and assess whether the merger clearance provisions of the Competition Law are going to be triggered. If the above thresholds are not exceeded by the parties involved, formally there is no need to clear an ‘agreement on joint activities’. In order to avoid the risks specified above and gain certainty, the parties may still consider submitting the agreement voluntarily to the FAS, as provided for in the Competition Law.

Further, in line with the liberalisation trend, the register of economic entities with a market share exceeding 35 per cent is no longer maintained by the FAS: a specific ground for obtaining prior approval in relation to the transactions involving such companies has been abolished. Such transactions will require clearance with the FAS only if the established financial (see below) thresholds are met. By virtue of this amendment, the number of transactions previously subject to FAS’ clearance on this largely administrative ground (if the financial thresholds were not met) is expected to be reduced.

The amendments of the Fourth Anti-monopoly Package led to a number of procedural changes in the field of merger control. The FAS is required to publish the basic information on the submitted merger control filings (including those relating to the joint venture agreements discussed above) on its website so that all interested parties are able to provide their opinion on the impact of transaction on competition. In the past, this procedure was available only where the FAS extended the review period to look into a transaction subject to notification.

Furthermore, the parties may now submit the information on the contemplated transaction before filing a formal notification, provide supporting documents and economic analysis, and propose remedies. The FAS is supposed to take this information into account when reviewing the notification for clearance. Also, it is possible to submit the merger clearance notification electronically, in the format prescribed by the FAS. However, the competition authority has not yet issued any guidance on both issues.

ii Recent practice of the competition authority

As in the past, the FAS seeks to move from a formalistic approach and concentrate on major deals that may give rise to competition concerns. The FAS focus includes the following markets: pharmaceuticals and healthcare, the chemical industry, energy and natural resources, agriculture, infrastructure, transportation, financial services, and telecommunications. Several global M&A deals (primarily involving the acquisition of control rights over a Russian company by virtue of acquiring a foreign target (group) with a subsidiary in Russia) were reviewed by the competition authority in 2015.

According to the FAS’ officials, around 1,800 pre-transaction notifications were reviewed in 2015, which is slightly lower than in 2014 (mostly due to the reduced number of M&A transactions). The pattern established in the past remains in place: conditional clearance is granted in about 5 per cent of cases, while prohibitions are exceptional (1–1.5 per cent).

As for conditional clearances, behavioural remedies dominate and structural remedies such as divestment are less common. Administrative barriers (practical application) constitute one of the main impediments for the development of structural remedies.

Most of the few cases involving rejection of transactions in 2015 related to the market for energy resources (in particular, petrol) and other highly concentrated markets where the notified deals involved undertakings with significant market shares and the transaction could limit competition, including creating or strengthening a dominant position (e.g., wholesale of liquid caustic soda; zinc and zinc alloys; cement). Other grounds invoked in two rejected deals were, respectively, failure to provide the documents and information requested by the FAS (in the absence of which the competition authority could not reach a conclusion on the transaction’s impact on competition) and failure to disclose information on the ultimate economic beneficiaries.

As reflected by the FAS’ annual report, even in the existing economic and political environment, foreign companies are still interested in potential investment opportunities in Russia. For example, 44 notifications for ‘strategic’ clearance were initially reviewed by the competition authority (see Section III, infra, for more information); and 19 notifications were finally reviewed in terms of their substance by the Government Commission: nine deals were cleared unconditionally, eight notifications were cleared subject to certain conditions to be complied with by a foreign investor that is required to enter into a relevant agreement with the FAS, and the review of other two notifications was suspended for further assessment together with other authorities.

III THE MERGER CONTROL REGIME

i Transactions and thresholds

Generally, the notification is to be undertaken as a pre-transaction clearance. Post-transaction filing is possible only in relation to certain intra-group transactions (instead of pre-transaction filing) where the information on the group is provided to the competition authority before the transaction is implemented.

If an intra-group transaction is implemented between legal entities or individuals that are part of the same ‘group of persons’ under Article 9(1)(1) of the Competition Law (a company and an individual or legal entity directly or indirectly holding more than 50 per cent of shares in that company), it is expressly exempt from the merger control requirements. If the parent company holds more than 50 per cent of the subsidiaries’ shares, the transactions between the parent company and its (direct or indirect) subsidiaries, as well as between the subsidiaries controlled by the same parent company, would benefit from this exemption.

To this end, the pre-transaction filing is still necessary for certain intra-group transfers. Alternatively, Article 31 of the Competition Law provides for a specific clearance procedure for intra-group transactions that would otherwise be subject to prior approval. It is possible to make a prior disclosure of the group structure to the FAS, which is made publicly available by the competition authority, and then further notify the FAS of the transaction once completed.

The Competition Law provides the following jurisdictional thresholds for pre-transaction clearance (see Section II, supra, for the thresholds applicable to joint venture agreements):

  • a the aggregate worldwide value of assets of the acquirer’s group and the target’s group of companies exceeds 7 billion rubles and the aggregate worldwide value of assets of the target’s group of companies exceeds 400 million rubles; or
  • b the aggregate worldwide turnover of the acquirer’s group and the target’s group of companies from the sale of goods, works and services during the last calendar year exceeds 10 billion rubles and the aggregate worldwide value of assets of the target’s group of companies exceeds 400 million rubles.

The above thresholds apply to undertakings active in the commodity markets. Different thresholds apply to financial organisations, as established by the government together with the Central Bank of Russia.

The worldwide data are relevant for calculation purposes; the thresholds are based on the book value as reflected on the balance sheet as of the latest reporting date preceding the notification date. The value of assets (turnover) of the acquirer’s group and the target’s group are taken into account. The assets of the seller and its group are not relevant if the deal results in the seller and its group losing the right to determine the business activities of the target. Still, if the seller disposes of a minority stake or otherwise retains control over the target, the assets of the ‘whole’ group are used for the calculation.

Under the Competition Law, the following transactions require pre-transaction approval from the FAS if the thresholds are met:

  • a the acquisition of more than 25 per cent, 50 per cent or 75 per cent of the voting shares in a Russian joint-stock company, or more than one-third, one-half or two-thirds of the participatory interests in a Russian limited liability company;
  • b the acquisition of direct or indirect rights to determine the business activities of a Russian company (including those based on voting arrangements or agreements such as the shareholders’ agreements providing for additional voting rights) or to act as its executive body;
  • c the acquisition of the fixed assets (except for land plots and non-industrial buildings or premises, such as warehouses) or intangible assets of a company if the book value of the acquired assets located in Russia exceeds 20 per cent of the total book value of the fixed and intangible assets of the transferor (for companies operating in commodity markets);
  • d the incorporation of a company if:
  • • its charter capital is paid up by the shares, participatory interests or fixed or intangible assets of another company; and
  • • a new company, as a result, acquires: more than 25 per cent of the voting shares in a Russian joint-stock company; more than one third of the participatory interests in a Russian limited liability company; or fixed or intangible assets that are located in Russia and amount to more than 20 per cent of the total book value of the fixed and intangible assets of the transferor;
  • e the reorganisation (in the form of a merger or consolidation); and
  • f the execution of a joint venture agreement between competitors.

Pure foreign-to-foreign transactions need to be cleared before the Russian competition authority if they are related to the acquisition of more than 50 per cent of the voting shares in a foreign company that generated turnover on the Russian market in an amount that exceeds 1 billion rubles in the preceding year, or the acquisition of direct or indirect rights to determine the business activities or to act as the executive body of such company. A local presence is not required.

Furthermore, the acquisition of shares in a non-Russian holding company that owns shares in a Russian subsidiary may be caught by the Russian merger control rules as the acquisition of indirect control rights over the Russian subsidiary. This is one of the most common grounds for clearance, partially due to the fact that the concept of ‘control rights’ is rather broad and leaves much room for interpretation. As long as the target does not have any direct sales, or own shares in Russian companies or assets located in Russia, the filing is not necessary.

ii Time frames

The notification must be submitted before the closing to allow sufficient time for the FAS to review the notification. The clearance is valid for one year from the date of the decision. If the transaction is not completed within one year, a new filing procedure must be initiated.

The initial review period is 30 days from the date of submission of the notification with all the documents to the competition authority. Transactions that do not restrict competition are normally cleared within this statutory term, provided that the required information has been submitted in full to the FAS.

The second stage review may evolve differently. The FAS is entitled to extend this time frame by an additional two months if there are concerns that the transaction may restrict competition (in-depth analysis is necessary or further information is requested). The FAS publishes the information concerning the transaction on its website so that the interested parties can share their views on its effects with the authority.

iii Review procedure

The concept of ‘restriction of competition’ constitutes the main part of the substantive analysis. Generally, transactions that do not to result in the restriction of competition are cleared. The percentage of rejections is rather small: in most transactions that are prohibited, their adverse impact on competition is obvious and cannot be remedied.

The FAS has a right to prescribe binding pre-closing conditions (e.g., granting access to the infrastructure or certain IP rights, or divesting) that must be complied with by the parties before the clearance will be granted. The relevant term for implementing the conditions is determined by the competition authority and will not exceed nine months. Once the required conditions are complied with, the supporting documents are submitted to the FAS, which reviews the documents within 30 days and issues a final decision either granting clearance or prohibiting the transaction. Practically speaking, extensions of this kind are very rare, since the FAS clearly prefers to issue binding orders providing for post-closing conditions.

If the transaction is subject to ‘strategic’ clearance under the Strategic Investments Law, the antitrust clearance can only be granted if there is an affirmative decision by the Government Commission. From a technical perspective, this filing is administered by the FAS, who are responsible for the initial review and assessment. The competition authority looks at the formal aspects, communicates with other authorities (e.g., the Federal Security Service and the Ministry of Defence), and, thereafter, provides the Government Commission with its recommendations and assessment. The final decision rests with the Commission. The review period is extended until the Government Commission issues a decision on the transaction. If the Government Commission does not grant its approval, then the antitrust clearance notification is rejected.

The review of the notification results in one of the following decisions: clearance of the transaction (conditional or unconditional) or rejection of the notification. According to the statistics, rejections are not common: except for politically impacted cases, a transaction can be prohibited only if it restricts or may restrict competition. The refusal to grant clearance can also be based on formal grounds: if the data included in the notification turns out to be false, or if the applicant fails to provide the documents crucial for the FAS to complete its review. In practice, the FAS typically issues its decisions in line with the deadlines specified in the Competition Law. Transactions that do not restrict competition are on average cleared within 40–45 days (including the time for obtaining the hard copy of the clearance decision). This timing usually serves as guidance for the parties in planning the closing date.

There are no official acceleration procedures or other options to expedite the review of a merger clearance notification. The most obvious recommendation is to submit the full set of documents specified in the Competition Law and the FAS regulations to avoid delays or a situation where an incomplete notification is considered as ‘not presented’. In the latter case, the applicant has a right to request the authority to return the notification, proceed with the collection of the outstanding documents and file all the documents anew (the review period will begin again). The collection of the necessary documents (e.g., information on the parties, their groups, assets/turnover, business activities, transaction structure) can take some time to complete as in many instances the Russian merger control filing remains a rather technical exercise. Although this is not formally necessary, to streamline the review the parties may choose to provide economic data (evidence), such as their assessment of the market shares and main competitors.

Requests for information from the FAS are very common. Normally, after the filing is submitted the applicant’s representatives communicate with the FAS case handler in order to pre-empt any official requests. In contrast to the official written requests that are likely to lead to the extension of the review period, the ‘informal’ requests can be addressed swiftly, which results in a more straightforward review of the notification.

iv Third-party access

The role of third parties in the FAS’ review is rather limited. Their basic right is to provide their outlook on the envisaged transaction to the authority. Interested parties may provide their opinions as to effect of the transaction on competition. In certain instances, the FAS may on its own initiative decide to send requests to other market players and collect their feedback. Under the Competition Law, only the FAS may challenge mergers and initiate the associated proceedings. Any third parties that wish to challenge a merger would need to contact the FAS.

More importantly, no third parties can have access to the merger control files to examine the data submitted by the parties or obtained by the competition authority. Where necessary, the sensitive commercial data shall be provided to the FAS as part of the notification. The officials are specifically required to keep such information confidential and cannot disclose it to third parties. Failure to comply with these rules can result in liabilities. The review of the notifications containing such information is confidential, and from a practical perspective, the benefits of this procedure are not obvious (for example, it is not possible to directly contact the case handler in the course of the review).

v Competition concerns, appeals and judicial review

If the FAS has competition concerns, it may decide to grant conditional clearance. In this case the FAS issues a binding order where the necessary remedies are specified. Generally, structural remedies are uncommon, and behavioural remedies are preferred by the FAS. By way of illustration, the requirement to create a commercial policy and make it publicly available (so that existing and potential distributors can have access to the document) is one of the most common remedies, particularly in the pharmaceuticals industry.

The reasoning behind the remedies can be based on political considerations in ‘sensitive’ transactions; nonetheless, the remedies are usually envisaged to deal with competition concerns. There is no official procedure for negotiating remedies. With the probable exception of high-profile deals, the FAS is free to prescribe the remedies it deems appropriate and does not consult with the parties. However, the parties may try to propose certain alternatives in order to address the competition concerns. According to the FAS’ officials, the introduction of these negotiations into the FAS practice is possible in the near future.

The decisions and binding orders of the FAS establishing the remedies (e.g., if the parties involved find the remedies excessive) can be challenged in full or in part in the Russian commercial courts. The binding order is to be suspended until the court decides on the matter. The number of appeals in the area of merger clearance is fairly insignificant. The applicants mainly appeal the FAS decisions on rejection of the notification on formal grounds. The court practice is controversial but there are examples of successful appeals.

vi Effect of regulatory review

If the transaction requires prior approval of the competition authority, it must be suspended until clearance and can be implemented after approval has been granted. There are no exceptions to the suspensory effect; no waivers or derogations are available. In this regard, there are no provisions in the Competition Law that would allow the rollout of the global transaction without obtaining a clearance in Russia. The carve-out scenario may be acceptable in certain situations. However, its implementation would be subject to a number of conditions to be complied with in order to avoid any contravention with the Competition Law requirements.

Gun-jumping practices are prohibited and may result in the same sanctions as failure to submit the notification: administrative fines of up to 500,000 rubles imposed on an acquirer (or the founders of a new company) required to notify the authority (fines of up to 20,000 rubles may also be imposed on the company officials), and in the most extreme cases invalidation by the court upon the FAS claim. The main risk is the potential rejection of the notification by the FAS. The transaction may be scrutinised by the competition authority as, most likely, it will be reluctant to grant clearance based on various grounds (e.g., purely technical and formalistic).

The FAS is the authority that controls compliance with the merger control rules. As discussed above, the Government Commission is in charge of the approval of transactions caught by the Strategic Investments Law: only the Commission can grant ‘strategic’ clearance. By way of background, other laws may contain industry-specific merger approval requirements (for instance, in banking and insurance where the Central Bank of Russia is the regulator), which are separate from the Competition Law provisions, and restrictions or prohibitions as to foreign participation (media, air transportation).

IV OTHER STRATEGIC CONSIDERATIONS

The key issues associated with coordinating the clearance of a global transaction with a Russia-related component are the strict suspensory regime of the Competition Law with a limited number of carve-out options and the arbitrary approach often exercised by the FAS in relation to more complex transactions, which makes it difficult to predict the exact scenario of the review. In this regard, the basic recommendation would be to start preparation of the filing in advance and structure the relevant undertaking with due consideration of the Russian filing and its time frame. Particular attention should be paid to proposed transactions with ‘strategic’ companies: the importance of initial analysis, planning and compliance with the formal requirements cannot be overestimated.

Considering that not all matters in the area of merger control are expressly dealt with in the Competition Law, the FAS’ practice is evolving, as is the Competition Law. Still, a lot of concepts and rules existing in other jurisdictions or used in the course of global deals are provided for in the Competition Law and may not be applicable in Russia. Thus, one of the most obvious examples is the clearance and assessment of non-competition obligations and other ancillary restraints in the context of M&A transactions.

There are no special rules applicable to situations where the Russian target is in financial distress or undergoing insolvency. Thus, if the financial thresholds are met by the companies and groups involved, transactions with the companies under insolvency proceedings (most notably, the asset deals) are subject to the same treatment as those with ‘active’ companies. Essentially the same requirements for obtaining the clearance will apply.

V OUTLOOK AND CONCLUSIONS

The FAS considers the best global practices (e.g., clearance of joint venture agreements) and tries to be consistent, with the objective of reducing the administrative burden for businesses and liberalising the rules in the area of merger control, as suggested by the Fourth Anti-monopoly Package. After the entry into effect of these amendments, market players expect further guidance and clarifications from the competition authority as to the new procedures available under the Fourth Anti-monopoly Package.

According to the Head of the FAS, additional amendments to the Competition Law (the Fifth Anti-monopoly Package) can be reasonably expected and should cover such topics as correlation between IP and antitrust regulations, issues of parallel import, implementation of the anti-monopoly compliance programmes by undertakings, abolition of the obsolete regulations applicable to natural monopolies, amending the rules on tariff regulation, and class actions. In the past, some of these matters were widely discussed by the practitioners but eventually were not included into the Fourth Anti-monopoly Package.

Likewise, the FAS seeks to reform the Strategic Investments Law with a view to implementing a balanced system that would let the authority control the ‘strategic’ industries and bring in foreign investors. The FAS has drafted the amendments aimed at aligning the provisions of the Russian corporate legislation with the Strategic Investments Law, in part relating to the acquisition of certain blocks of shares in public joint-stock companies.

Footnotes

1 Maxim Boulba is a partner and Maria Ermolaeva is an associate at CMS Russia.